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108 Management’s discussion and analysis

Management’s discussion

and analysis

Business overview and Economic Environment

Fiscal 2007 – highlights

Fiscal 2007 was an eventful year that closed with one of Siemens’ best operating

quarters in history. Net income rose 21% and earnings per share for the year rose

20% compared to ﬁ scal 2006, we exceeded our targets for revenue and order

growth, and proﬁ tability increased strongly throughout Operations. We also com-

pleted the repurchase of the remaining outstanding amount of a €2.5 billion con-

vertible bond issue which reduced dilution for Siemens shareholders by nearly 35

million shares. We expect the positive development of Siemens to continue in the

coming two ﬁ scal years with revenue growing by at least twice the rate of global

gross domestic product (GDP) and Group proﬁ t from Operations to grow at least

twice as fast as our revenue (for further information see “Outlook”).

Higher net income and EPS. Siemens’ net income in ﬁ scal 2007 was €4.038 bil-

lion, a 21% increase over €3.345 billion a year earlier. Basic earnings per share

(EPS) was €4.24, up from €3.52 in ﬁ scal 2006. Net income in the current year was

reduced by substantial corporate costs associated with legal and regulatory mat-

ters, which are discussed below. In addition, tax expense associated with the

carve-out of Siemens VDO Automotive (SV) reduced net income by approximately

€1.1 billion. This expense was booked at SV when it was determined to be held for

disposal and therefore part of discontinued operations. Furthermore discontin-

ued operations included a preliminary non-cash pre-tax gain of €1.6 billion gener-

ated by the transfer of the former Communications Group’s carrier-related busi-

nesses into Nokia Siemens Networks B.V. (NSN). Discontinued operations overall

contributed €129 million to net income in ﬁ scal 2007 compared to €703 million a

year earlier. More detail on discontinued operations is provided below.

Increased proﬁ tability. Income from continuing operations was €3.909 bil-

lion for the year, 48% higher than a year earlier. Basic and diluted EPS on a con-

tinuing basis rose to €4.13 and €3.99, respectively, compared to €2.78 and €2.77

a year earlier. These increases were due to Group proﬁ t from Operations, which

climbed 70% year-over-year to €6.560 billion, even with negative equity invest-

ment income of €429 million related to NSN, which was formed by Nokia Corpora-

tion (Nokia) and Siemens in April 2007. All Groups in Operations increased their

Group proﬁ t and Group proﬁ t margin. Automation and Drives (A&D), Power Gen-

eration (PG), Medical Solutions (Med) and Power Transmission and Distribution

(PTD) had the highest levels of Group proﬁ t. Siemens IT Solutions and Services

(SIS) beneﬁ ted strongly from severance programs in ﬁ scal 2006 totaling €576 mil-

lion, and recorded Group proﬁ t of €252 million for the current year compared to

a loss of €731 million in the prior year.

Rapid growth in Group proﬁ t more than offset a signiﬁ cant increase in Corpo-

rate items, pensions and eliminations year-over-year, which rose from a negative

€527 million in ﬁ scal 2006 to a negative €1.672 billion in the current year. The

change is due primarily to the legal and regulatory matters discussed below.